Category: Hedge

“A recent article in Reuters posits that hedging against sterling will be more expensive as the May 7th election nears, particularly against the euro and US dollar,” said Hasty.

“Although this may be the case, businesses should be aware that this would be the lesser of two evils, the worse-case scenario being that they will have to throw themselves upon the mercy of live or ‘spot’ rates, which could move even more unfavourably in their favour.

“We saw how the vote on Scottish independence affected currency markets last year. It is likely that the elections will also influence markets significantly.

“Businesses that know that they will need to be purchasing currency in the run up to the election need to have clear strategies, most of which should involve hedging their currency purchases to protect their bottom line against risk. This is also a prudent move post-election, when the dust settles from whatever results.”

Research recently carried out suggests that many City firms are now moving towards outsourced services, rather than running everything in-house.

The outsourcing concept for regulated firms has taken many years to become a readily accepted alternative. However, the steep and rising costs involved to remain compliant coupled with high infrastructure and salary costs are forcing regulated firms to move towards a more compatible structure in order to remain competitive and profitable.

Stephen Pinner, Managing Director of Goodacre UK which conducted the research, said:”Firms within the wealth management sector have had a range of clearing and outsourcing services available to them for some years. However, as a new set of cost, legislative and regulatory pressures increase and new service providers emerge, many business owners are re-evaluating their infrastructure.

Interestingly, buy side firms such as Hedge and Pension Funds who have similar pressures to the sell side, can also now take advantage of support services offered by regulated organisations. It is now possible for these firms to outsource a variety of requirements, including trading. A small hedge fund employing a couple of dealers could save as much as £750k, perhaps more, by using an outsourced alternative. Quite simply, any benefits from the ‘do it all in-house’ approach are being very strongly challenged by the high fixed costs and related encumbrances involved. A switch to specialist outsourcers could deliver significant cost savings and quite possibly, an improved level of service”.

Hedge fund compensation increased in 2014 as total capital invested in the hedge fund industry again reached new records, according to the 2015 Glocap Hedge Fund Compensation Report, released today by Glocap Search and HFR®.

With the industry reaching a new high of $2.82 trillion in assets and net inflows at their highest level since 2007, the industry finds itself in tight competition for talent against other industries, as well as other hedge funds, for top finance professionals. Compensation increased 5-10 percent over 2013 compensation, according to the 2015 Glocap Hedge Fund Compensation Report, with front office roles including Portfolio Managers, Traders and Senior Analysts seeing increases, as well as professionals in Marketing and IT at top performing funds.

Glocap Search is a leading alternative investment management search firm, focused on covering all functional roles within hedge funds, private equity, venture capital, and other financial services. HFR is the established industry leader in the indexation, aggregation and research of the global hedge fund industry.

Over the first three quarters of 2014, global hedge fund industry capital exceeded $2.82 trillion, the ninth consecutive quarterly asset level record, as the HFRI Fund Weighted Composite Index gained +2.90 percent YTD. The percentage of all hedge funds which reached their high watermarks YTD through September also rose to 68 percent, a sharp increase from the 48.4 percent of funds, which had reached respective high watermarks only two years prior (2012).

“Hedge fund bonus pools continue to grow in 2014, inflated by management fee income, even if the performance contributions are more variable. But hedge funds will again be increasing their pay to retain and attract top talent, especially as more capital enters this competitive market,” notes Anthony Keizner, head of Glocap’s Hedge Fund practice.

Analysts at large hedge funds, managing greater than $4 billion and performing near the industry average, experienced a base salary increase of 6 percent and a bonus increase of approximately 5 percent, for an average compensation increase of 5.4 percent to a total compensation of $372,000.

Portfolio Managers and other Senior Investment Professionals at large hedge funds saw less change in their base salaries, with these typically earning an average base salary of $275,000, although bonus increases ranged from 2 percent to 15 percent, topping the average increase from 2013. Overall, the average compensation for a PM of a large fund with performance near industry average increased by nearly 8 percent to $2.4 million.

Pace of hedge fund hiring sped up in 2014

Compensation growth trends showed not only a continuation, but an acceleration of trends observed in 2013, including greater transparency and use of deferred compensation. Firms placed a premium on individuals across all roles, including those in operational and risk groups, which are able to operate as client-facing resources. As a result of competition from other hedge funds, as well as industries including private equity, venture capital, and other financial services, new trends for qualified candidates include shorter evaluation timeframes, earlier involvement of more senior management personnel from the hiring firm and a greater likelihood of receiving offers from multiple firms.

“While hiring in recent years has been more opportunistic, there has been a greater urgency in 2014 to filling key roles at hedge funds; the time from introduction to a candidate starting has decreased from 6 months to 3 months. Examples are increasing of hiring in just a few weeks, especially when someone has left a fund that is folding, or when there are multiple funds chasing the same candidate,” noted Keizner.

Compensation models evolving

In addition to fund performance being the primary determinant of hedge fund compensation, firm compensation models also consider an increasingly broad and complex continuum of qualities, designed to reflect increased teamwork, risk-based capital returns, firm promotion, extending duration of incentives and scrutiny from both regulators and investors of compensation practices.

“Hedge fund compensation structures continued to evolve in 2014 as industry capital reached record levels, balancing competing pressures for talented finance professionals from other industries against increased pressure for lower fees and long-term performance-based compensation packages,” stated Kenneth J. Heinz, President of HFR. “The continued emphasis on performance generation, as well as increased emphasis of teamwork, firm profitability and the decreased use of large guaranteed compensation packages, has contributed to a greater alignment of interest which properly incentivizes employees to expand their firms in a responsible manner.”

The gap between the best and worst performing hedge funds has narrowed during the first half of 2014, BlackRock’s latest analysis of the hedge fund industry has found.

Hedge fund managers’ performance varied widely in 2013, but 2014 has seen the spread narrow between the top and bottom managers. Top decile hedge funds returned 11%, compared to losses of -5% for bottom decile hedge funds, narrowing the range from the previous year. In 2013, the inter-decile range was between 15.5% to -6.5%. Alpha, or the component of these returns attributable to manager skill, varied significantly between strategies, in some cases, representing almost 60% of average total returns.

David Barenborg, head of hedge fund manager research at BlackRock Alternative Advisors, said, “The total return profile across hedge fund strategies is different from this time last year, but the data confirms the key issue for investors in hedge funds remains identifying managers with the most skill.”

M&A boon for some

Funds that were able to profit from idiosyncratic risk drivers, rather than market beta, performed well in the first half of 2014, with ‘relative value’ and ‘event-driven’ managers demonstrating the highest alpha on average across hedge fund strategies.

Event-driven hedge funds, which aim to exploit pricing inefficiencies around corporate events, took advantage of the highest level of global M&A activity since 2007 to deliver an average alpha of 2.5% on total index returns of 4.3%, meaning over half of the fund’s returns were attributable to manager skill.

Barenborg added, “The M&A environment has proven to be fertile hunting ground for event-driven hedge funds, and many managers have delivered on their alpha promise. Similarly, we have also seen strategies focused on distressed investing benefit from pockets of distress in some emerging markets, as well as an increase in high yield and leverage loan defaults in the second quarter.”

Challenging market for equity hedge funds

In contrast, 2014 has so far proven a more challenging environment for alpha generation among equity hedge managers, which aim to profit from long and short positions in stock markets.

While average total returns here delivered 2.6% in the first six months, average alpha was negative at -0.8%, and this style also demonstrated a wide dispersion between the best and worst managers, BlackRock’s research found. The best equity hedge managers (top decile) have continued to deliver both high alpha and total returns of 7.6% and 12% respectively.

“Many average and below-average equity hedge funds performed well on a total returns basis in 2013, but in many cases, this was driven by the beta in their portfolios, rather than manager skill, or alpha. This has been made more evident in the less bullish equity environment we have seen this year,” Barenborg said.

BlackRock’s research and outlook

BlackRock’s research examined the H1 2014 returns of 1,549 hedge fund managers in the Hedge Fund Research, Inc database, separating returns into three categories – ‘traditional beta’ such as general market returns, ‘non-traditional beta’ such as equity sector spreads, and ‘alpha’ – the component of the returns that was unexplained and therefore attributable to manager skill.

Barenborg stated, “This research demonstrates the importance of thoughtful manager selection within any given strategy. Looking ahead, continued policy uncertainty, volatility and potential market mispricings will continue to provide opportunities for event-driven and relative value hedge funds in particular. That said, over the long-term a diversified exposure to multiple hedge fund strategies, with a selection model which focuses on each manager’s ability to generate alpha consistently rather than short-term historical total returns, will provide the best outcomes for investors.”

BlackRock manages $34.3 billion in 30 single strategy, multi-strategy and hedge fund solutions, and the firm is a pre-eminent provider of alternative investment solutions globally, with over $115 billion in assets as of June 2014.

The UK’s fund management sector recovered quickly from the fall experienced at the outset of the economic downturn and was responsible for a record £6.2tn of funds at the end of 2013 – nearly 50% above the pre-crisis peak.

According to the Fund Management 2014 report, released today by TheCityUK, the private-sector association and industry lobby group promoting the UK’s financial and professional services industry, over a third of these funds, around £2.2tn, came from overseas clients, making the UK a global leader in managing foreign clients’ funds.

The 2013 figures show the sector overall has experienced its fifth consecutive year of growth, increasing 14%. TheCityUK also estimates that assets increased by around 5% in the first six months of 2014, with the full year increase forecast to top 9%.

Chris Cummings, Chief Executive, TheCityUK, said: “The UK is one of the leading international centres for fund management and by far the largest European centre. The fund management sector is also one that consistently generates a significant trade surplus for the UK economy.

“The strength of these latest figures also demonstrates the attractiveness of the UK as place in which, and from which, to do business. While London is central to the UK’s strong international position, other cities such as Edinburgh, Glasgow, Aberdeen, Manchester, Liverpool, Cardiff and Birmingham are also important centres for fund management. In fact one third of the 50,000 people directly employed in the sector are based outside of London.”

The report also shows that nearly two thirds, some £4tn, of funds under management came from institutional clients, with retail clients generating a further 16% (£999bn). The remainder is accounted for by private client funds and alternative funds.

In an international context, UK funds under management accounted for 8.4% of global fund management assets, totalling US$146tn at the end of 2013. The US remains by far the biggest source of funds, accounting for nearly half of assets.

While the UK is largely known as a centre for management of international funds, it is increasingly becoming a location of choice for domicile of funds. Of the top five European locations for domicile, the UK saw the biggest increase in assets in 2013 (10.9%), ahead of Luxembourg (9.7%), Ireland (9.5%), Germany (9.2%) and France (1.3%).

Cummings said: “As the leading global centre for cross-border financial services, London and the wider UK are well positioned to capture a growing share of business from international markets which offer the greatest potential for growth.

“TheCityUK welcomes actions taken by the Government to make the UK as competitive as possible for fund domicile and management. We look forward to continuing our work with Government under the Financial Services Trade and Investment Board (FSTIB), our members and the wider industry to extend the promotion of the fund management sector overseas and to help drive jobs and growth across the country.”

Deloitte has furthered strengthened its hedge fund practice with two key appointments for the UK and EMEA regions.

Chris Farkas joins Deloitte as UK hedge fund leader. He was Deutsche Bank’s European head of hedge fund consulting in its prime brokerage group, working with global top 100 hedge funds and significant hedge fund start-ups. Prior to Deutsche Bank, Chris was head of sales at GlobeOp and executive director on the Goldman Sachs European hedge fund consulting team. Chris qualified as a Canadian Chartered Accountant in 1999 before joining Deloitte Canada.

Farkas’ appointment follows the announcement that Deloitte’s Brian Forrester will take on the role of hedge fund leader for the Europe, Middle East and Africa region. Forrester is a partner with Deloitte in Ireland, having recently returned to Ireland after two years with the UK firm. Forrester has 20 years’ experience in the hedge fund industry, working in the Caribbean and Channel Islands as well as the UK and Ireland. Forrester said: “Investors recognise the need for customised portfolios and are using hedge funds to provide better risk adjusted returns and diversification. As a result, investor allocations are increasing and hedge funds are expanding to take on more assets and staff whilst launching new products. This convergence within asset management has led to a surge in demand for advisory services. We wanted to make sure the right people were in place to meet these client needs, and Chris will lead this effort.”

Farkas added: “We are at a pivotal time in the industry. Hedge funds are growing and embracing significant changes to their operating models, whilst testing their ability to scale. Regulations have changed the way managers run their business from trading to marketing. Investors seeking to preserve capital and minimise the risk of their investment now require a higher level of assurance regarding a hedge fund managers’ business.”

Whitebox Advisors, the US management firm led by industry veteran Andrew Redleaf, has announced the opening of the Whitebox Tactical Income Fund. The launch provides individual investors and investment advisors access to Whitebox’s long-tenured team of fixed income managers who apply an alternative investment philosophy often associated with hedge funds.

“We think investors have come to expect too little from their fixed income allocations. With the Whitebox Tactical Income Fund, we aim to show investors that more is possible,” said Andrew Redleaf, Founder and CEO of Whitebox Advisors. “As we have for many years for our hedge fund clients, the team will dive deeply into the fixed income market in search of unique, idiosyncratic opportunities. What we feel sets us apart from other mutual funds is our ability to remain flexible, opportunistic, and to tactically deviate from convention to isolate value – wherever it can be found in the immense fixed income markets.”

Pete Wiley, the fund’s lead portfolio manager and a 10-year veteran of Whitebox Advisors’ fixed income strategy team, said: “Our specialty is scouring the entire fixed income universe for investments we view as being attractively priced, with high-return potential and low risk. We believe we are able to find these opportunities for our clients, not only due to our depth of experience, but because our flexibility and agility permits us to meaningfully participate in areas of the market we view as undervalued.”

“One reason corporate bond yields are currently suppressed, we believe, is that so many mega-sized bond funds are buying the same huge issues from the same huge issuers,” said Wiley. “We believe those bonds are overbought and that the danger facing many fixed income investors is that they may feel safe in traditionally managed bond funds. Unfortunately, when interest rates go up, the assets of millions of people invested in traditional fixed income funds could fall victim to bond-market repricing and some of those funds’ general inability to adapt quickly.”

Forex signals provider iFexx has launched an algorithmic investment program (AIP) for auto forex trading, aiming to help small investors implement a high-frequency trading strategy on their Forex account.

High-frequency trading, or HFT—a special class of algorithmic trading used by investment banks and institutional traders, recording high profits in different market conditions—allocates total portfolio risk into small orders in a diversified basket, in order to hedge risk and market impact. iFexx’s technology is capable of analysing multiple strategies on a variety of charts and executing pre-programmed orders simultaneously.

“Small traders and investors have been at a severe disadvantage over the past several years due to the increase in high-frequency trading. Market dynamics have changed dramatically through chaos caused by these systems,” said Ben Venier, chief market analyst at iFexx.

“HFT is the power to distinguish volatility and making expeditious decisions before others, this is the theory behind automated trading models. Automated forex trading has become extremely popular since mirror and social trading has been introduced, yet they are unable to present genuine and consistent results due to massive membership turnover.”

AIP is a new concept designed and delivered by iFexx, to simplify trading for investors at any level. It enables traders to access one of the most advanced automated trading models in the Forex industry, a tool for Forex accounts to receive and execute auto generated algorithmic Forex Signals via Trade Copier in coordination with Black-Box system. The system is equipped with risk management tools for conservative, moderate and aggressive money management styles.

The company offers access to the technology through monthly and yearly subscriptions. Twelve months Forex Virtual Private Server (VPS) with windows Server 2012 is included to the yearly package for 24 hours trading without interruptions.

Hedge funds lost 0.09% in March, according to the Barclay Hedge Fund Index compiled by BarclayHedge. The Index is up 1.39% year to date.

“Global equity markets experienced their version of March Madness as fears of Russian expansionism, Fed tightening, and slowing growth in China spiked intra-month volatility,” says Sol Waksman, founder and president of BarclayHedge.

The Equity Short Bias Index fell 2.47% in March, the Technology Index lost 2.34%, Healthcare & Biotechnology gave up 1.29%, Global Macro was down 0.92%, and European Equities lost 0.90%.

On the positive side, the Distressed Securities Index was up 0.86% in March, Convertible Arbitrage gained 0.79%, and Fixed Income Arbitrage gained 0.50%.

“In spite of higher interest rates and lower prices on US Treasuries, prices on high yield bonds rose and contributed to the narrowing of credit spreads, which typically provides a favorable backdrop for relative value fixed income trades,” says Waksman.

At the end of the first quarter, the Healthcare & Biotechnology Index is the strongest performer with a 9.63% gain. Distressed Securities are up 4.20%, the Event Driven Index has gained 3.03%, and European Equities havereturned 2.82%.

After three months, Equity Short Bias is down 4.78%, Pacific Rim Equities have lost 2.06%, Global Macro has given up 1.70%, and Emerging Markets are down 1.61%.

The Barclay Fund of Funds Index lost 0.73% in March, but remains up 0.62% year to date.

Institutional investors view activism as a successful tool used among hedge fund managers to increase returns and stimulate growth in their investments, according to a new survey conducted by Novus at the PartnerConnect/HedgeWorld East Conference in New York City.

“With institutional investors under increasing pressure to add value and deliver returns, we’re not surprised to see unconventional investment strategies like activism growing in popularity and a great uptick in allocators willing to employ them,” said Basil Qunibi, CEO and Founder of Novus, a portfolio intelligence and analytics company based in New York.

The survey found:

– The majority of experts (78%) believe activism drives shareholder value – Nearly all respondents (94%) anticipate activism will grow in popularity – Just under three-quarters (70%) said they would be willing to personally invest in funds that employ this strategy– Respondents widely agree (77%) that hedge funds will be negatively impacted when their founders step back or retire – 88% of experts believe the industry will continue to institutionalise– Nearly two-thirds of experts (61 percent) said post-financial crisis, pensions are under extreme pressure to generate greater returns as opposed to focusing on preserving existing capital

“Today’s institutional investors face an uphill battle when it comes to managing their liabilities, placing enormous pressure on both managers and allocators to increase alpha,” continued Qunibi. “At Novus, we believe that diving into existing portfolios to analyse them in an objective way and making sense of disparate data from various sources is the best way to unlock value and reveal hidden opportunities for any investor. In doing so, we’ve helped our clients gain significant additional alpha in comparison to their peers.”

The survey of 65 alternative and institutional investing professionals was conducted by Novus Partners at the HedgeWorld/PartnerConnect East Conference in New York City. Respondents included managers of and investors in the alternative asset management industry, including hedge funds, private equity firms, managers of family offices, pension funds and other institutional investing professionals.

Novus is a next-generation, web-based portfolio analytics and intelligence platform for institutional investors. The Novus Platform is used by many of the top hedge funds, fund of funds, pensions, sovereign wealth funds and endowments to analyze risk, performance and attribution across aggregated and historical data sets.

Portfolio managers, investor relations teams and operations teams use the Novus Platform in different ways to generate more alpha, analyse and manage their risks, report to their investors and become more efficient with resources.

Through the firm’s data-driven approach, industry-leading analytics and unique team of ex-portfolio managers and investors, Novus is transforming the way the world invests.

Hedge funds were up 1.83% in February, recovering from their losses in the start of the year as the MSCI World Index posted gains of 3.87% during the month.

Key takeaways for the month of February 2014:• Hedge funds recovered from January losses – all investment strategies yielded positive returns during the month with long/short equities and distressed debt leading with gains of 2.42% and 2.33% respectively

• North American managers posted their sixth consecutive month of positive returns, up 2.46% during the month and 10.5% over the last 12 months

• All regional mandates delivered positive returns during the month, excluding Japan focused hedge funds which posted their second consecutive month of negative returns – down 1.06% in February

• Distressed debt investing hedge funds delivered their eighth consecutive month of positive returns – up 2.33% in February and 17.7% in the last 12 months

• Asset flow data from 2013 shows that 2,027 hedge funds had positive asset flows during the year, out of which 357 managers raised more than US$100 million. Meanwhile, 879 hedge funds recorded net asset outflows in the previous year while 1,557 funds reported marginal or no inflows

• The Eurekahedge Asian Hedge Fund Awards 2014 will be taking place on 23 May 2014 at Capella Singapore. See last year’s photos and video.

Regional Indices

Global markets trended upwards during the month led by a resurgence of investor confidence in the global economy. Market sentiment held strong as weaknesses in recent US macroeconomic data were largely attributed to the weather conditions, with Fed chair Janet Yellen reaffirming the need to keep the QE tapering on track as the US economy continues its recovery. Emerging markets also showed signs of stability with the MSCI Emerging Market Index rising 2.15% during the month. Meanwhile, positive macroeconomic data from the Eurozone showed acceleration in manufacturing activity which provided further support to the markets.

All regional mandates, with the exception of Japan, ended the month in positive territory with North America focused hedge funds realising the strongest gains. The Eurekahedge North American Hedge Fund Index was up 2.46% as MSCI North America Index5 gained 4.47% during the month. European fund managers were up 1.87% with the FTSE 100, DAX and CAC Index rising 4.60%, 4.14% and 5.82% respectively. Fund managers focused on Eastern Europe and Russia were up 0.29% during the month, emerging largely unscathed as the crisis in Ukraine intensified towards the month-end. Latin America focused hedge funds outperformed underlying markets yet again, with managers delivering gains of 0.50% in contrast to a 0.69% decline in the MSCI EM Latin American Index.

The Eurekahedge Asia ex Japan Hedge Fund Index was up 1.81%, with Greater China and India focused hedge funds delivering gains of 1.02% and 4.05%. Japan investing hedge funds were down 1.06% as the Yen remained largely flat versus the US dollar (marginally down 0.06%) with the Nikkei 225 Index and Tokyo Topix declining 0.49% and 0.74% during the month.

Strategy Indices

All hedge fund strategies posted positive returns in February, with long/short equities managers outperforming their peers and delivering gains of 2.42% as global equity markets rallied during the month. Distressed debt investing hedge funds posted their eighth consecutive month of positive returns, up 2.33% – outperforming the BoFA Merrill Lynch US High Yield Index which gained 2.0% during the month. Multi-strategy, arbitrage and fixed income hedge funds were up 1.57%, 1.20% and 1.16% respectively, while managers deploying macro strategies rebounded from their January losses to finish the month with gains of 1.32%. CTA/managed futures strategy was up 1.71%, with managers realising gains from their exposure to precious metals as gold and silver rallied during the month. Managers utilising systematic or trend following strategies also posted strong gains and were up 2.17% during the month.